Buying or selling a wealth management firm requires careful planning. One of the most important considerations centers on valuation, which is typically based on one or more multiples. Here’s a closer look at the most often-used wealth management firm valuation multiples.
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Wealth Management Firm Valuation Multiples
A multiple is a measurement tool that compares one metric to another. When you’re discussing multiples for wealth management firms, you’re typically talking about one of three things:
- Revenue
- Assets under management
- EBITDA (Earnings before interest, taxes, depreciation, and amortization)
We’ll look at how each one works, including typical valuation multiple ranges for wealth management firms.
For the ranges, we’ll use data from Sica Fletcher’s 2024 RIA Valuation Multiples report. The report covers five types of RIA firms: Institutional, Investment Management-Only, Niche, Retirement Plan Advisors and Wealth Management. For our purposes, we’ll focus solely on the ranges for small, mid-market, and large wealth management firms.
1. Revenue
Revenue is a commonly used metric for valuation calculations. The enterprise value to revenue formula can help you determine a multiple to use for valuations.
Enterprise value represents the totality of a firm’s market capitalization and liabilities, minus its cash. The EV/revenue multiple can indicate whether a firm’s profitability is likely to increase or decrease.
To use this valuation method you’d first calculate your firm’s EV, then divide it by your annual revenue to arrive at a multiple. You’d then multiply that number by your revenue to get a valuation.
For example, say your annual revenue is $10 million and your EV/revenue ratio is 2.5. That would give you a valuation of $25 million ($10 million x 2.5).
A multiple of 2.8 to 4 is typical for revenue-based valuations of wealth management firms, according to Sica Fletcher.
2. Assets
The asset valuation model works like the revenue model. You’d divide EV by your AUM to arrive at a valuation multiple. You’d then multiply that number by your AUM.
For example, if you have $100 million in assets under management and your EV multiple is 1.1, your valuation would be $110 million.
The EV/AUM multiple tells you how valuable a firm is relative to the assets it manages. A typical range is 1.1% to 2.3% for wealth management firms, based on Sica Fletcher’s data.
3. EBITDA
EBITDA is one of the most reliable methods for establishing wealth management firm valuations. EBITDA is a measurement of a firm’s financial health based on its cash flow and operations.
Calculating the EV to EBITDA ratio can tell you if a firm is over or undervalued, relative to competitors. Here, you’d divide your firm’s EV by EBITDA to get your multiple, then multiply that number by your earnings before taxes, interest, dividends, and amortization.
A higher EV/EBITDA ratio indicates that the company may be overvalued while a lower ratio suggests that it’s undervalued. A typical multiple is 5.4 to 7.5 for wealth management firms, based on the Sica Fletcher report.
What Influences a Wealth Management Firm’s Value?
A host of factors can shape a wealth management firm’s valuation. Here are three of the most influential metrics that can affect valuation outcomes:
- Client-based factors. Your book of business can affect valuation. Key factors include the number of clients you have, their demographic details, AUM per client, new client acquisition rates, client concentrations and retention rates.
- Financial factors. Some of the metrics that can influence values in the financial category include where your revenue comes from, your firm’s revenue growth over time, profitability trends, operating expenses and cash flow, firm assets and your liabilities.
- Operations-based factors. How you run your firm also makes a difference. Operations-based factors that influence valuation include your business model and management structure, management compensation, employee demographics, the age of your company, your service offerings, marketing and brand recognition, strategic partnerships and business development efforts.
How to Get an Accurate Wealth Management Firm Valuation
If you’re interested in what a wealth management firm is worth you can apply any of the models or multiples included here to get a valuation. Keep in mind, however, that no valuation model is 100% accurate.
Getting a solid valuation may require outside help. A valuation consultant can dig into the details of the firm and provide a comprehensive overview of its value.
It’s important to do your research to find the right person or firm to work with. As you compare the options, consider:
- How long they’ve been in the valuation business
- Expertise and specialty areas
- Turn-around times
- Fees
You may ask around in your network to see if any advisors you know have a valuation consultant they’d recommend.
Frequently Asked Questions (FAQs)
How Are Wealth Management Firms Valued?
Wealth management firm valuations are most often based on one of three approaches. The income approach establishes value using the firm’s revenues. The asset approach uses the firm’s assets under management as a guide. A third approach establishes value based on the sale of similar competitor firms in the market.
Which Multiple Is Most Accurate for Valuing Wealth Management Firms?
The EV/EBITDA ratio is a popular method for determining wealth management firm valuations, but it’s not the only option. Firms may also use the ratio between enterprise value and assets or enterprise value and revenue to find a valuation multiple.
What Is the Discounted Cash Flow (DCF) Model for Valuations?
The DCF model uses discounted cash flow to determine value. This method uses the present value of future cash flows to establish a firm’s worth. Discounted cash flow isn’t always reliable, as it’s based on assumptions made about future cash flows versus actual numbers.
Bottom Line
Valuing a wealth management firm is often complicated as numerous factors can affect valuation at a given point in time. Applying one or more valuation multiples can give you a range of numbers to work with if you’re considering buying or selling a wealth management firm.
Tips for Growing Your Advisory Business
- Marketing and brand recognition can play a sizable role in valuations. The more recognizable your firm’s brand is, the more it may be worth to a buyer. If you’re looking for a way to increase your digital footprint, you might consider partnering with an advisor marketing platform. SmartAsset AMP can help growth-focused advisors raise visibility and connect with leads. Schedule a demo to learn how you can leverage it to grow your business.
- You can use valuation multiples to determine what a book of business is worth if you’re interested in buying another advisor’s client list. When buying a book of business, consider how much it’s worth to you and what kind of return on investment you can expect.
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